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The most frequent question we are getting lately: why is this European currency so strong?
One would think that with the bail-out of Portugal, even more downgrades of Irish government bonds and Greece a Dead Man Walking, the euro would get hammered with this tsunami of gloom & doom news from the European markets.
But, on the contrary, the euro is going strong… very strong! Currently, the currency is trading at 1.44, a level not seen since January ’10 and just a fraction from the highs of 1.5 and the ultimate top around 1.59.
We hear experts say that with the bailout of Greece, Ireland, and now even Portugal, enough steps have been taken by the European authorities in which increased funds are made available for even more disasters in Europe. Frankly, in the long run, this should only be euro-bearish as these rescue packages require more freshly printed euros.
We feel more for the reasoning that investors are pricing in future rate hikes by the ECB. These moves would make the EU look stronger than its most important peers.
But in the end, maybe investors are looking at it in the wrong way. The euro isn’t that strong, it’s the US dollar that is becoming weaker by the day! The benchmark is always the US dollar, as its (still) the world reserve currency, thus measuring all other fiat currencies against it.
With the recent negative outlook for US Treasuries by S&P, investors are dumping their dollar holdings and taking cover in other currency assets. That’s why the US dollar index, which is a measure of the value of the United States dollar relative to a basket of foreign currencies, is getting pummeled.
Even more so, you can see that the US dollar is slowly but surely turning into confetti as the ultimate currencies, gold & silver, are going wild, with gold reaching $1502 and silver at $44.5 per ounce this morning during European trading.
However, we don’t feel that the euro will keep up for much longer. The pressure in Europe is getting enormous, with the biggest threat still out there: Spain! If this gigant starts to tumble — which is still in the cards with the unemployment on a rise, deficits above targets and weak GDP growth — Trichet & Co will turn up the euro printing press a few notches once again.
Don’t bet the farm on this euro paper!
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